If you are considering bankruptcy as a way out of debt, one of the first things a bankruptcy lawyer may look at is your income. Lawyers do this to determine if a person is eligible for Chapter 7 bankruptcy, which is the branch many people prefer because it offers debt forgiveness. If your lawyer finds that you qualify for Chapter 7, there is still a chance he or she will recommend using Chapter 13, and here are several reasons why.
You Want to Save Your Home
Through Chapter 7, you can keep your home; however, this only occurs if you are current on your payments. If you are behind on payments, especially if you are in the midst of a foreclosure, Chapter 7 will not offer a lot of help, but Chapter 13 will.
After filing for Chapter 13, the court will issue something called an automatic stay. An automatic stay forces all creditors to stop collection efforts for all debts. The automatic stay also stops mortgage lenders from pursuing foreclosures. In other words, the automatic stay will put an end to your foreclosure.
You will then have up to five years to catch up on past-due mortgage payments. If you successfully do this, you can keep your home. The other benefit is that when the five-year period ends, you will be current on your mortgage payments.
This five-year period is designed to help people get a fresh start by giving them time to work out repayment plans with creditors and make the payments the bankruptcy court sets up.
You Have Debts That Cannot Be Forgiven
Chapter 7 bankruptcy offers a fresh start for people who owe a lot of money to credit card companies or who have other types of non-secured debts. Chapter 7 has limitations, though. It does not offer forgiveness for all types of debts. This includes past-due tax debts, child support, and student loans.
If you owe money on debts that Chapter 7 would not forgive, using Chapter 13 offers an advantage. Through your repayment plan, you can catch up on past-due payments on bills that bankruptcy will not forgive. Chapter 7 does not offer this benefit. There is no repayment plan of any kind with Chapter 7.
You Own Things You Want to Keep
The third reason your lawyer might recommend Chapter 13 is if you want to keep assets you own. One of the tradeoffs of Chapter 7 is that you must surrender assets to the court if the court requires this, and there is nothing you can do to avoid this.
For example, if you own a boat outright, the court might make you give this up if you file Chapter 7. The point is for the court to sell the item to raise money to help pay debts forgiven through your bankruptcy case.
In Chapter 13, you do not have to give up your assets. You can keep everything you own. You are not receiving forgiveness of debts through Chapter 13. Instead, you are repaying the debts you owe, and this is why you will not lose assets if you file Chapter 13.
A lot of people also choose Chapter 13 simply because they want to repay their debts, and this is one benefit of using Chapter 13 over Chapter 7. It may not look as bad to creditors if you file Chapter 13, and you may feel more peace of mind knowing you repaid your debts.
Without getting legal advice, you will not know the best route for your situation. This is why you should contact the Law Offices of Paul McElrath to schedule a consultation appointment. By doing this, you can find out what branch is right for your situation.